READOUT OF US-JAPAN TRADE FORUM

UNCLAS SECTION 01 OF 08 TOKYO 005355 SIPDIS STATE PASS TO USTR FOR AUSTR WCUTLER SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECONETRDEAGRJA SUBJECT: READOUT OF US-JAPAN TRADE FORUM ¶1. (SBU) SUMMARY: An array of bilateral trade issues were addressed and policy discussions on FTAs held in the fourth meeting of the U.S.-Japan Trade Forum in Tokyo on October 18. Assistant U.S. Trade Representative Wendy Cutler led the U.S. delegation, while Director General for Economic Affairs Yoichi Otabe led the Japanese side. In the talks, both sides agreed to continue their information exchanges on free trade agreements (FTAs) with third countries and engaged in candid discussions of U.S. and Japanese approaches and policies with respect to FTAs with other countries. Bilateral issues covered included Japan's continuing restrictions on exports of U.S. beef; a review of an Expert Level dialogue on public works, barriers to trade in Japan for marine craft; and impediments to U.S. rice cake flour exports to Japan. Japan raised U.S. import and labeling procedures for organic products and meat extract from Japan, as well as highlighted its concerns with the 100 percent cargo scanning provisions established in the recently enacted so- called "9/11 Act." END SUMMARY. -------------- BACKGROUND -------------- ¶2. (U) On October 18 the United States and Japan held their fourth set of Trade Forum talks in Tokyo. The Trade Forum was established under the 2001 Economic Partnership for Growth (EPG). Assistant U.S. Trade Representative (AUSTR) Wendy Cutler led the U.S. delegation and MOFA Director-General for Economic Affairs Yoichi Otabe led the Japanese side. Immediately prior to the start of the Trade Forum, Cutler and Otabe exchanged recommendations under our bilateral Regulatory Reform Initiative, which the two governments carry on a separate track under the EPG. -------------- OPENING REMARKS -------------- ¶3. (SBU) Otabe congratulated Cutler on the successful conclusion of the Korea-U.S. Free Trade Agreement. He asked that Cutler now refocus her energies on Japan, joking that this year, unlike in years past, the Japanese Government could honestly say that it was pleased by her visit to Japan. Otabe expressed satisfaction that this year's Regulatory Reform Initiative agenda included a number of new items, reflecting the evolution that the process has undergone. He later stated that success of this Initiative has led Japan to implement a similar dialogue with the European Union (EU) and possibly launch another such dialogue with Canada. He emphasized the importance of U.S. Government action on zeroing, which he said had been judged to be inconsistent with U.S. obligations under the World Trade Organization (WTO). ¶4. (SBU) Cutler agreed the U.S.-Japan relationship was changing and improving. Noting that a number of items in our Regulatory Reform Initiative took on "urgent significance," she emphasized the following three areas: 1) the importance of valuing appropriately and rewarding innovative medical devices and pharmaceuticals; 2) ensuring a level playing field for the banking, insurance, and express delivery sectors during the privatization of Japan Post, and 3) the liberalization of bank sales of insurance products. She said she also was happy to be discussing new issues under the Initiative. -------------- REPORT ON PUBLIC WORKS EXPERT-LEVEL MEETING -------------- ¶5. (SBU) The Japanese delegation described as "productive" the July 31 bilateral public works expert-level meeting. A representative from the Ministry of Land, Infrastructure and Transportation (MLIT) announced that his ministry had advanced TOKYO 00005355 002 OF 008 recommendations concerning licensing for construction work in the United States. On U.S. concerns regarding bidding practices in Japan, he said that his delegation explained Japanese thinking as much as it could during the meeting. ¶6. (SBU) Cutler expressed her disappointment that the U.S. market share in Japanese public works is still less than one percent. She said she was pleased that the July 31 technical meeting produced progress on several issues and the hope that we can see the U.S. market share break the one percent level through continued work. She noted three areas where she wished to see more progress and urged Japan to publish all definitive criteria in procurement notices as per the action plan so that U.S. firms could bid on projects. She also asked that MPA procedures be used for all procurements associated with the Chubu airport, which although completed is still awarding contracts. She urged the GOJ ensure design firms are compensated appropriately for their work. ¶7. (SBU) Commerce Department Japan Office Director Nicole Melcher noted progress since the 2005 Trade Forum in: streamlining of foreign engineers' registration requirements, increasing the use of mixed-type procurements, addressing unreasonably high business evaluation scores, simplifying documentation requirements for Public Invitation Proposal Procedures, providing information on Toshi Saisei and PFI projects, and increasing efforts to implement Construction Management procurements. She also outlined two additional areas of concern: the Okinawa Institute of Science and Technology, and the three-company rule for joint ventures. ¶8. (SBU) Otabe thanked Melcher for her report and said that in the wake of any progress made with the United States to open market access to public procurement, Japan experiences strong pressure from South Korea to receive the same treatment. He emphasized the importance of regulatory transparency to foreigners. Otabe described the classification of the Chubu airport as a future project, which may have had an impact on how the procurement procedures were implemented. The MLIT representative suggested a lack of mutual understanding still remains in certain respects and looks forward to adding on the improvements that have already been made. ¶9. (SBU) Cutler urged Japan to be more flexible regarding the timing of future Expert-Level Meetings on Public Works and noted that MLIT and the Department of Commerce would hold informal consultations the next day to discuss some of the topics raised in the day's session. -------------- U.S. AGENDA ITEMS -------------- -- Marine Craft: ¶10. (SBU) With respect to marine craft, Cutler expressed strong frustration with having discussed this issue for nine years and urged Japan to adopt more transparent and less burdensome regulations that would still ensure the safety of vessels and engines imported to Japan. She said she was pleased with Japan's adoption of certain International Standards Organization (ISO) standards and expressed the hope that Japan would adopt future international standards without modification. ¶11. (SBU) Melcher highlighted better understanding of regulations that had been achieved through a digital video conference (DVC) with MLIT, and that there was AGREEMENT to continue holding DVCs at the rate of three to four per year. The topics agreed upon for the next DVC focus included ISO standards adopted by Japan and steps Japan has taken to ensure the consistent application of regulations at all ports. She said the USG had also agreed to include MLIT's request to discuss U.S. adoption of ISO TOKYO 00005355 003 OF 008 standards during the next DVC to be held in November or December -- with exact dates would be worked out soon. Cutler said we welcomed the AGREEMENT to continue DVCs and encouraged both sides to approach this issue with renewed energy and a commitment to solve problems in this area. ¶12. (SBU) Otabe said Japan's view that the discussion at the working level had covered seven areas and had solved most issues, including plastic fuel tank procedures. He noted the U.S. delegation's references to ISO standards, quipping that it had been his impression that the United States did not attach a great deal of importance to such standards. He said that Japan had tried to incorporate as many ISO standards as possible into its regulations, noting that 40 such standards had been incorporated already. Otabe concluded by pointing out that Japanese imports of marine craft from the United States were growing. -- Beef: ¶13. (SBU) Noting the upcoming visit of USTR Special Envoy Richard Crowder and Deputy Undersecretary of Agriculture Ellen Terpstra on October 22, Cutler underscored the U.S. expectation that Japan reopen its beef market consistent with World Animal Health Organization (OIE) standards and implement trade policies that were based on science. ¶14. (SBU) Otabe asserted that the Government of Japan fully shared the U.S. view on the importance of resolving this issue. He also emphasized that Japan would work to resolve this issue in a manner that was consistent with "science," as Former Prime Minister Abe promised President Bush in September. He noted the need to find a practical way of moving the issue forward, stating that the Government of Japan hoped soon to finalize the draft Technical Working Group report on the issue. ¶15. (SBU) Cutler raised concern that when Japan ends its BSE age restrictions and permits all imports of U.S. beef, the resulting increase in imports would likely trigger Japan's beef import safeguard, raising tariffs from 38.5% to 50%. These safeguards, which are intended as a means to mitigate the effects of particularly dramatic import surges, would be inappropriate in the case of U.S. beef because normal market conditions do not currently exist in Japan given its import restrictions. Cutler asked that when the fiscal year regulations are drafted (over the next month or two),import safeguard measures be established in a manner that allows trade to return to its pre-2004 levels without triggering the safeguard. Shiro Inukai, Deputy Director, Meat Marketing and Trade Policy Division, MAFF and MOFA's Otabe assured Cutler that her point, as well as several other factors, would be taken into consideration. In fiscal years 2006 and 2007, Japan established a more lenient safeguard calculation to account for an increase in imports. Cutler pressed them several times for more affirmative language ("positively"),to which they settled on "in a fair manner". -- Rice: ¶16. (SBU) Cutler expressed exasperation that she had raised this issue at the last Trade Forum two years ago in Seattle but had since seen little progress. She noted when the Japanese rice stock release program was approved, Japan had promised that it would not disadvantage imports of U.S. rice cake flour mix. However, she commented that trade data to date showed that it was hurting rice cake flour mix imports, not only from the United States, but from other countries as well. Noting the exchange of letters from Deputy USTR Bhatia/USDA U/S Keenum with MAFF Vice Minister Murakami, she took issue with Murakami's insistence that higher U.S. prices for rice cake mix due to higher prices for sugar and California rice are the factors leading to a decline in U.S. rice cake imports into Japan. In contrast, TOKYO 00005355 004 OF 008 she said, imports had declined because Japan was flooding the domestic market with its release of MMA rice stocks that were priced significantly below what the product would otherwise cost in Japan. USDA officials passed out data to demonstrate these trends. ¶17. (SBU) Otabe responded with three points. First, he asserted MAFF's policies were necessary to manage the balance of supply and demand of a product that is seen as having a "special nature" in Japan. He noted the overall decline in consumption of rice and processed rice products in Japan. Second, Otabe stated the MMA system is a key component of Japan's effort to balance supply and demand. He commented the release system expands the domestic consumption of MMA rice and that because this was the best use of it, the U.S. Government should be happy with the policy. Third, Otabe referenced Murakami's letter and its explanation of prices as affecting Japanese import levels. He also commented that high Chinese and Indian consumption of commodities are causing rising costs in general -- and are causing decreased import levels as a result, and not exclusively for rice flour cake mix. ¶18. (SBU) MAFF International Affairs Director Tomaoki Uemura cited four factors as the primary culprits behind the drop in U.S. rice cake flour mix imports: 1) changes in foreign exchange rates that have weakened the Japanese yen; 2) poor rice harvests in California that have driven upwards the cost of U.S. rice; 3) the increased cost of ocean freight services; and 4) the increase in the price of sugar in the United States. Uemura assured the U.S. delegation that he would continue to watch these trends. ¶19. (SBU) Tokyo Senior Agricultural Attache Spencer noted prices for wheat, rice, corn, barley and other commodities have also risen dramatically, but there has not been a decline in Japanese imports. Furthermore, information USDA had received from traders indicated the price of released MMA rice was the determining factor. An increase in unit prices does not necessarily translate into corresponding decreases in imports and that freight costs should affect commodities equally, he said. He also asserted Japan was confusing two of its WTO obligations: first, its imports of MMA rice due to the Uruguay Round negotiations, and second, the status of rice flour cake mix as a bound tariff. He noted MAFF's role as a state trader was impairing market access, clarifying that he was referring to Article XXIII of GATT. ¶20. (SBU) Otabe agreed Japan needs to honor its WTO commitments and wondered about the demand elasticity of other agricultural products. He commented on MAFF's efforts to preserve traditional rice-based products during an age of changing tastes. He asked the USDA representative if his reference to Article XXIII was implying a possible nullification and impairment of U.S. market access rights, to which the USDA representative responded affirmatively. This sparked a few minutes of debate between Otabe and Uemura that was not translated and seemed moderately heated. Finally Uemura commented on the impact of inflation on other commodities and said he would have to look into why the effect of reduced imports was only seen in imports of rice flour cake mix. (NOTE: At a reception Otabe commented privately he thought the rice cake flour issue presented WTO problems for Japan. End Note.) -------------- JAPANESE AGENDA ITEMS -------------- -- Organic Farm Products ¶21. (SBU) Otabe commented on the fact that U.S. regulators have not yet acted on Japan's application for equivalent recognition with respect to organic TOKYO 00005355 005 OF 008 product labeling practices. Agricultural products had been identified as having high export growth potential in Japan, he said, and the export of organic products represented one of Japan's highest priorities. He reminded the U.S. delegation that Japan first submitted its application to U.S. regulators in early 2006. He noted Japan had already granted equivalency to U.S. labeling procedures in this area. ¶22. (SBU) Cutler responded that this was a win-win issue for both parties. Unfortunately, she had been informed regulators in the U.S. have been very busy making revisions to the United State's own organic rules. Cutler acknowledged both sides were frustrated and urged the Japanese delegation to discuss this issue further within the Regulatory Reform Initiative to try and seek a solution. The Japanese responded that they would. -- Meat-related Substitute ¶23. (SBU) Otabe introduced Japanese concerns that U.S. import regulations with respect to meat extract products, which are used as seasoning for processed foods, are unnecessarily strict and inconsistently applied. Occasionally imports of these products from Japan are not authorized, Otabe said, but sometimes they are. He asked for more clarity and consistency with respect to U.S. import regulations in this area. A MAFF representative noted this was the most common complaint his agency heard from Japanese importers in the United States. He said it was his understanding beef extract products were banned in the United States due to BSE concerns. ¶24. (SBU) The USDA representative responded Japan's request was reasonable and promised to obtain more information regarding import procedures for these products. The USDA representative noted more specific information on the products involved would be needed and suggested the USG should be able to review the request through the same channels as those used to review Japan's beef exports to the U.S. -- Other Issues (One Hundred Percent Cargo Scanning) ¶25. (SBU) Otabe raised the 100 percent scanning requirements set out in the recently-enacted "Implementing Recommendations of the 9/11 Commission Act of 2007" ("9/11 Act"). He highlighted Japanese cooperation with the U.S. on a variety of security- related fronts since 9/11, such as the priority given by PM Fukuda to ensuring the extension of the law authorizing Japanese support to the Operation Enduring Freedom mission in Afghanistan. He reminded the U.S. delegation of Japanese concerns with respect to the 100 percent scanning requirements in the 9/11 Act, as were laid out in a letter from Japanese Ambassador Kato to various U.S. Cabinet-level Secretaries and Members of Congress. Specifically, he said, the Japanese worry implementation of the provisions would create severe and unnecessary disruptions to global trade. ¶26. (SBU) Cutler responded by recognizing the importance that the Japanese attach to this issue. She said that U.S. agencies were in the process of preparing a response to Ambassador Kato's letter, and promised to relay Otabe's concerns to the Department of Homeland Security and other key players in the U.S. Government. -------------- FTA ISSUES -------------- -- Next Steps on FTA Information Exchanges ¶27. (SBU) Cutler and Otabe turned to discuss next steps in the exercise to exchange information our respective Free Trade Agreements with other countries, an undertaking endorsed at the December 2006 Sub-Cabinet Economic Dialogue meeting and reflected in the Bush-Abe April 2007 Summit joint TOKYO 00005355 006 OF 008 statement. Otabe said so far exchanges of information had been held on eight FTA chapters. These exchanges had gone well and should continue until all relevant chapters were covered, something he considered a priority. The two governments had some differences in their respective approaches, but also shared many commonalities. Japan has engaged in the model measure exercise in Asia-Pacific Economic Cooperation (APEC),Otabe said, but the country's bilateral exchanges with the United States were of far more importance to Japan. ¶28. (SBU) Otabe then proposed broadening the exchanges to cover specific issues or countries as opposed to the chapter-specific exchanges that had been conducted to date. He noted that Japan was currently engaged in negotiations with certain developing countries, such as India and Vietnam, and that these talks had produced new types of difficulties as these countries appeared to "care more about their status as developing countries" than did other trading partners with which Japan had previously negotiated. It would be interesting, Otabe said, to hear the United States' experience addressing such problems. Japan was also very interested to hear about the United States' experience negotiating with Korea. He proposed we report on our experiences to date during the upcoming Sub-Cabinet dialogue scheduled in December. ¶29. (SBU) The U.S. Government had also found the FTA information exchanges useful, Cutler told Otabe, and agreed they should continue. She added that she would like to see information exchanges on chapters that the U.S. includes in its FTAs but that are not present in the Japanese Economic Partnership Agreements (EPAs, the preferred Japanese lexicon for their agreements). Cutler listed as examples the U.S. chapters on labor, environmental issues, and pharmaceuticals and medical devices. ¶30. (SBU) Otabe agreed there was no reason to exclude such chapters. Japanese EPAs may not include specific chapters devoted to these issues, but they are addressed in some manner, including labor and environment. It would be interesting to hear the U.S. experience in these areas, he said, since they are likely to gain importance over time. If the U.S. side was interested, Otabe proposed sharing the Japanese experience with providing environmental and labor cooperation within the context of the Association of Southeast Asian Nations (ASEAN). ¶31. (SBU) Cutler emphasized the importance of deciding "how to report on our work." She said the immediate concern was reporting to the Sub-Cabinet, but expressed concerns such a report would not be finished in time for its next meeting in December, particularly given past experiences where such documents had required protracted negotiations on both sides. Both Cutler and Otabe agreed given time constraints the best option would be to prepare a short, factual paper (rather than a lengthy analytical piece) identifying the similarities and differences in our FTAs. Cutler suggested the report could be even more ambitious, to which Otabe agreed. Cutler said she would need to discuss the proposal with her colleagues and provide an official response at a later date. With respect to developing countries that attempt to leverage their developing status to obtain special and differential (S&D) status, Cutler said that we look at metrics on whether a trading partner is developing or developed. ¶32. (SBU) Otabe pointed out the U.S. had initiated some FTA discussions with South Africa, a country where Japan has had poor experience in negotiations. He also noted one of Japan's current priorities is in the development of activities in energy-rich countries, an area where he would be interested to hear the U.S. experience. A Ministry of Economy, Trade and Industry (METI) representative pointed out that the U.S. and Japan had both negotiated with Malaysia, and it would be useful to compare and TOKYO 00005355 007 OF 008 contrast their respective experiences there. With respect to the report, she emphasized that she and Otabe would need to be personally involved to ensure that the draft does not become held up due to procedural differences. She also noted no U.S. FTA beyond NAFTA had included energy security issues. -- Updates on FTAs with Third Countries ¶33. (SBU) Otabe began with an update on the status of Japan's ongoing EPA negotiations. He noted two new EPAs came into effect in 2007: one with Chile and another with Singapore. (The Singapore EPA was actually a revision of a prior EPA with that trading partner; the revision grants additional tariff concessions to Singapore in return for more concessions from Singapore with respect to financial services.) So far in 2007, Japan has signed EPAs with Thailand, Brunei, and Indonesia. The EPA with Thailand was approved by the Diet, but further action remained on hold pending more progress towards democracy in that country. Japan would like to submit the Brunei and Indonesia EPAs to the Diet, but the legislative priority at the moment remains renewal of Japan's OEF mission. Those EPAs will need majorities in both Houses of the Diet, but Otabe noted this probably will not be difficult because both political parties tend to support Japan's negotiation of EPAs. ¶34. (SBU) Japan has started negotiations with Vietnam and India, but the talks have encountered problems. The two countries are insisting that, due to their developing status, they can offer no more than 80 percent trade liberalization (though they are happy to accept Japan's 90 percent). Cutler asked how Japan defines "substantially all trade" for the purposes of GATT Article 24. Japan replied, "[trade liberalization of] 90 percent and above." Because India and Vietnam were offering only 80 percent trade liberalization, there were some questions about whether Japan could continue negotiations with those parties. ¶35. (SBU) With respect to Australia, Otabe indicated two rounds of talks have taken place since their launch, with the third round scheduled for November. Otabe said his government had encountered strong resistance from farmers and some Diet members, who were pressuring MOFA not to proceed with the negotiations given their strong agricultural components. As such, Otabe said he was "not optimistic" about the prospects for a speedy conclusion. ¶36. (SBU) Japan has also begun EPA negotiations with Switzerland, though Otabe admitted he was not sure why that country was chosen as a partner. Negotiations with Korea have been suspended since March 2004. Japan successfully negotiated a collective goods plus services AGREEMENT with ASEAN, but Japan will now be required to negotiate individually with each member country because ASEAN lacks collective bargaining power. In response to a question from Cutler, Otabe conceded the negotiation with ASEAN included Burma. However, because most of Burma's products already enter Japan duty-free due to Burma's Least-Developed Country (LDC) status, Otabe did not anticipate the AGREEMENT would yield many further gains for Burma. ¶37. (SBU) With respect to the potential of an FTA/EPA with a "large economy," Otabe said since the successful conclusion of the Korea-U.S. FTA negotiation, business associations such as Keidanren have urged The GOJ to pursue EPAs with similar "large economies." However, as a practical matter, the Japanese Government recognizes it is not in any position to pursue such negotiations at this time. In response to a question from Cutler, Otabe said discussions with the EU are being undertaken within separate business sector study groups in Japan and the EU, and are not to be considered government-to- government. TOKYO 00005355 008 OF 008 ¶38. (SBU) Cutler then offered an overview of the status U.S. FTA negotiations. Among other issues, she discussed the successful conclusion of the Korea-U.S. FTA. During this segment Otabe interrupted her to ask whether non-tariff barriers were a problem in Korea. Cutler responded there was a whole range of barriers that had to be addressed in the talks. In this respect, the U.S. - Japan Regulatory Reform dialogue had been instructive in advancing the KORUS agenda. ¶39. (SBU) Otabe then said he had heard German Chancellor and EU President Merkel had wanted to initiate FTA negotiations with the U.S, but had found little support from her colleagues to do so. He asked as well about the U.S.-EU Transatlantic Economic Council and the work the U.S, and EU are doing to remove regulatory barriers to economic engagement. Embassy Tokyo EMIN reviewed the development of the Transatlantic Economic Council over the previous year. Otabe appreciated hearing what the U.S. and EU had done to revitalize efforts to remove barriers to economic engagement, to boost transparency and find ways U.S. and EU regulators could be aware of each other's work and goals, and to improve the overall business climate to expand transatlantic ties and prosperity. EMIN noted there may be lessons to draw into the work between the U.S. and Japan. -------------- CLOSING REMARKS -------------- ¶40. (SBU) Cutler thanked Otabe and the Japanese delegation and suggested using the Trade Forum as a venue to discuss other cross-cutting trade policy issues in the future. ¶41. (SBU) Otabe responded he too would like to see the Trade Forum used to discuss other types of issues such as intellectual property rights (IPR), China, and climate change. In a theme he returned to several times during the day, he said that in contrast with the trade wars of the past Japan and the United States today shared many interests and objectives. He reiterated Japan was very pleased by Cutler's visit, and expressed his hope that she would come to Japan more often now that the Japan- Korea FTA had been concluded. This cable was cleared by USTR, Commerce and USDA. SCHIEFFER